Owner’s equity: what it is and how to calculate it

Published Monday 30 March 2026

Table of contents

• What is owner's equity?
• How to calculate owner's equity
• What's included in owner's equity
• Examples of owner's equity
• Where to find owner's equity
• What is a statement of changes in equity?
• Track your owner's equity with confidence
• FAQs on owner's equity

Key takeaways

• Calculate your owner's equity by adding up all business assets (cash, equipment, inventory, receivables) and subtracting all liabilities (loans, unpaid bills, taxes owed) to determine your true business worth on paper.
• Track your equity components regularly including contributed capital (your initial and additional investments), retained earnings (profits kept in the business), and drawings (money you've withdrawn for personal use).
• Use your balance sheet to find owner's equity automatically, as most accounting software generates this figure from your recorded transactions without requiring manual calculations.
• Review the statement of changes in equity when preparing for loan applications, investor meetings, or assessing how owner withdrawals impact your business value over time.

What is owner's equity?

Owner's equity is the book value of your business after subtracting what you owe from what you own. It shows your net worth on paper, though it won't predict the exact sale price you'd negotiate with a buyer.

You can calculate owner's equity at any time using your balance sheet.

How to calculate owner's equity

To calculate owner's equity, use this simple approach:

1. Add up your assets: everything the business owns, including cash, equipment, and inventory
2. Subtract your liabilities: everything the business owes, such as loans and unpaid bills
3. Calculate the difference: this is your equity, the value that belongs to you as the owner

Here's the formula expressed visually.

Owner's equity formula

The formula is straightforward, but accuracy depends on correctly identifying what counts as an asset or liability.

When calculating owner's equity

Count your assets and liabilities correctly to get an accurate equity figure.

Assets are everything your business owns that has value. Assets include:

• Tangible items: equipment, real estate, inventory, and cash in the bank
• Receivables: money owed by customers
• Intangible items: intellectual property, trademarks, and brand value

Liabilities are everything your business owes to others. Liabilities include:

Statement shows closing equity is equal to the opening equity plus the year’s net profit, minus owner withdrawals and taxes.

• Loans: money owed to lenders
• Payables: amounts due to suppliers
• Obligations: wages owed to employees and taxes due to the government

Statement shows closing equity is equal to the opening equity plus the year’s net profit and money introduced, minus owner withdrawals and taxes.

What's included in owner's equity

Statement shows closing equity is equal to the opening equity plus the year’s net profit and money from investors, minus owner withdrawals and taxes.

Owner's equity consists of several components that reflect your stake in the business. These components change as you invest money, earn profits, or withdraw funds.

Understanding each component helps you see where your equity comes from. The main components are:

• Contributed capital: the initial investment you made to start the business, plus any additional funds you've added
• Retained earnings: profits the business has earned and kept rather than distributing to owners
• Drawings or distributions: money you've taken out of the business for personal use, which reduces your equity

Together, these components determine your total owner's equity at any point in time.

Examples of owner's equity

Here's a simple example using home ownership.

If you own a house worth $300,000 but have a $120,000 mortgage, your equity is $180,000.

• Asset: $300,000 (house value)
• Liability: $120,000 (mortgage balance)
• Equity: $180,000 (what's left after subtracting the debt)

The same logic applies to your business. Here's how it works in practice.

Business example of owner's equity

A repair shop has the following:

Assets:

• Garage: $600,000
• Machinery: $50,000
• Inventory: $50,000
• Total assets: $700,000

Liabilities:

• Mortgage on premises: $300,000

Owner's equity: $700,000 − $300,000 = $400,000

Where to find owner's equity

Owner's equity appears on your balance sheet, listed after the assets and liabilities sections.

You'll also find it on the statement of changes in equity, which tracks how your equity moves over time. If you use accounting software like Xero, both reports are generated automatically from your transaction data.

What is a statement of changes in equity?

A statement of changes in equity shows how your owner's equity has moved over a period, typically a financial year. It connects your profit and loss statement to your balance sheet by tracking how earnings, investments, and withdrawals affect your equity.

This statement is one of the four basic financial statements that businesses use to report their financial position. Together, these statements give a complete picture of business performance:

• profit and loss statement
• balance sheet
• cash flow statement
• statement of changes in equity

The following examples show how the statement of changes in equity looks for different business structures.

Example of statement of changes in equity for a sole proprietor

Statement shows closing equity is equal to the opening equity plus the year's net profit, minus owner withdrawals and taxes.

Partnerships work similarly but may include additional capital contributions from partners.

Example of statement of changes in equity for a partnership

Statement shows closing equity is equal to the opening equity plus the year's net profit and money introduced, minus owner withdrawals and taxes.

Companies have a similar structure but typically include investor contributions.

Example of statement of changes in equity for a company

Statement shows closing equity is equal to the opening equity plus the year's net profit and money from investors, minus owner withdrawals and taxes.

Now that you've seen the format, here's when this statement becomes useful.

How the statement of changes in equity is used

Most small business owners focus on the profit and loss statement and balance sheet for day-to-day decisions. However, the statement of changes in equity becomes useful in specific situations. Consider using it when:

• preparing for a loan application or investor pitch
• tracking how owner withdrawals affect business value
• reviewing year-over-year growth in retained earnings

For routine performance management, the profit and loss statement and balance sheet typically provide the insights you need.

Track your owner's equity with confidence

Understanding your owner's equity gives you a clear picture of your business's financial health. It helps you make confident decisions about growth, reinvestment, and when to take money out of the business.

With Xero's cloud-based accounting software, you can track your owner's equity automatically on your balance sheet and statement of changes in equity. You'll get real-time visibility into your business's worth without manual calculations. Get one month free and see how Xero makes managing your finances easier.

FAQs on owner's equity

Here are answers to common questions about owner's equity.

Is shareholder's equity the same thing as owner's equity?

Yes. Sole proprietors and partnerships use "owner's equity," while companies and corporations call it "shareholder's equity." Both terms mean the same thing: the value remaining after subtracting liabilities from assets.

How do I calculate the owner's equity statement?

The statement of changes in equity tracks how your equity moves over a period. To prepare it:

1. Start with your opening equity balance
2. Add net profit and any new investments
3. Subtract owner drawings and distributions

Your accounting software can generate this statement automatically from your recorded transactions.

Do all transactions affect the owner's equity?

Most transactions affect owner's equity, though not always directly. Sales increase assets (and equity), while expenses reduce it. Taking on a loan increases both assets and liabilities, leaving equity unchanged until you spend or repay the funds.

What does negative owner's equity mean?

Negative owner's equity means your liabilities exceed your assets. This often happens in early-stage businesses that have taken on debt to fund growth or in businesses experiencing losses. While this requires attention, many businesses recover from this position. Review your cash flow and profitability trends to understand whether the situation is temporary or requires action.